Thomas Hoenig just crushed the arguments against breaking up the biggest banks.

Anyone who regards themselves as a friend of free markets should regard the speech by Hoenig, the Kansas City Fed president, as required reading.

“So long as the concept of a Sifi exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril,” Hoenig said.

Sifi is short for Systemically Important Financial Institution, those behemoth banks better known as Too Big To Fail.

Hoenig’s speech is important because he does an excellent job of explaining that the growth of Sifis was not a market phenomenon. They don’t represent an undesirable consequence of free-market capitalism or some kind of unfortunate market failure.

Here’s the irony: This marked increase in concentrated power, and therefore more concentrated risk, reflects past efforts to assure greater economic stability. This might best be described as “good intentions/bad outcomes” syndrome. For example, the Federal Reserve was founded following the 1907 Banking Panic and was charged with providing liquidity support to solvent banks that were experiencing funding problems. After the Great Depression, the Federal Deposit Insurance Corp. was created to provide limited deposit insurance to protect small depositors and to further increase the resiliency of the financial system.

Then, over the past 30 years, this safety net has expanded far beyond its original intent. More recently, Glass-Steagall was repealed, giving high-risk firms almost unlimited access to funds generated through their new access to the safety net. Finally, following a series of crises during the late 1980s and 1990s, the government confirmed that because of systemic impact, some institutions were just too big to fail—the largest institutions could put money in nearly any asset regardless of risk, and their creditors would not be held accountable for the risk taken. Predictably, the industry's risk profile increased dramatically. The Sifi was born.

There’s a lot more to Hoenig’s speech but this is one of the most important takeaways. Hopefully he’ll succeed in swaying some on Capitol Hill that breaking up the Sifis and requiring additional capital is not interfering with the free market but ameliorating the effects of prior interference.